Managers at Scottish Widows Investment Partnership and
Standard Life Investments, both based in Edinburgh, have bought
more shares in Derwent London and Great Portland, two of the
three best-performing U.K. real estate investment trusts this
year. Aberdeen Asset Management Plc, Scotland’s biggest fund
company, has also lifted its weighting in the two developers.

“We are very bullish about the central London office
market,” said Andrew Jackson, head of real estate strategy at
Standard Life Investments, the fund unit of Scotland’s biggest
insurer. “Great Portland and Derwent have assets that will let
well and will see a big accretion to their asset value.”

Derwent, Great Portland and Shaftesbury Plc, all based in
the U.K. capital, focus on London’s West End, which has the
world’s highest office rents, according to CB Richard Ellis
Group Inc. Returns on central London offices in the first four
months of 2010 were more than double those in the rest of the
city’s office market, CBRE said.

Jackson said he’s concerned the benefit Shaftesbury had
gained from the weakness of the pound attracting overseas
visitors to its shops would come to an end for the next few
years.

Prospects for U.K. REITs, whose shares are little changed
in the past 10 months, depend on the state of the economy, said
Watson, whose biggest holding is Paris-based Unibail-Rodamco SA,
Europe’s largest REIT.

“There is so much hanging on the wider picture,” she said.
“We need a lot more macro data coming through to be sure the
recovery is under way.”

That view is shared by Ben Ritchie, a senior investment
manager at Aberdeen Asset Management. Though Ritchie hasn’t
added to his holdings in Derwent London or Great Portland in
2010, they now make up a larger weighting in the Aberdeen
Property Share Fund because of their superior performance.

West End

“London and the West End is the place to get as much of
our money invested as we can,” Ritchie said. “London has
always been a strong long-term performer and is the part of the
U.K. economy that will do well in the next decade.”

Land Securities has the largest development pipeline in
London, Chief Executive Francis Salway said May 19. It has 1.2
million square feet (111,500 square meters) of offices and
retail properties under construction in the capital.

“There are a lot of speed bumps to get over in the macro
world, but it is not all doom and gloom,” said Ritchie, 29.

Standard Life’s Select Property Fund, which owns stocks as
well as offices and retail properties, and its Global REIT Focus
Fund have been cutting holdings in the largest U.K. REITs,
Jackson said.

‘Not Terribly Excited’

“We are not terribly excited about the big REITs,” he
said.

The money manager prefers smaller companies including
Helical Bar, LXB Retail Properties Plc and Minerva Plc, which
has two London offices under development at a time when there is
a shortage of new space.

Both Jackson and Watson say U.K. REITs will focus more on
asset management in the next few years.

“They cannot, and will not, develop as much as they have
in the past,” said Jackson, 41. “They were designed to give
property exposure, not property development. We will see them
increase dividend payouts and reduce gearing.”

The average dividend yield for REITs in Britain is 3.4
percent, compared with 3.3 percent for the U.K.’s FTSE All-Share
Index, according to Watson’s research. In the rest of Europe,
the average REIT yield of 4.8 percent exceeds the average 2.7
percent for the market as a whole.

Newer REITs

The U.K. real estate companies that converted to REITs when
the system was introduced at the peak of the property market in
January 2007 haven’t yet adopted the conservative strategies of
REITs in more mature markets, Watson said.

“In some ways, they are not REITs yet,” she said. “REITs
on the continent are very dull. They are more entrepreneurial in
the U.K, they are more creative, but that is not exactly what
REITs are about.”

Outside the U.K., Watson favors Stockholm offices and is
investing more in the Swedish landlords Hufvudstaden AB and
Castellum AB. Overall, she has relatively more money invested in
France than anywhere else in Europe. That partly reflects her
preference for Corio NV and Eurocommercial Properties NV, two
Dutch companies that own malls in France, and her stake in
Unibail-Rodamco.

Jackson also has holdings in Unibail-Rodamco and
Eurocommercial. In general, Standard Life Investments doesn’t
favor southern European real estate companies, he said, singling
out Spain and Italy as places to avoid.

“The quality of stocks is pretty poor and corporate
governance is particularly poor,” he said.

Aberdeen’s Ritchie regards Unibail-Rodamco as “pretty
cheap” and sees companies such as Silic, which owns business
parks in the Paris region, as low-risk. He is considering
investing in Scandinavia, he said.